Maximising business asset disposal relief using MVLs

Before the Budget, there was speculation about possible changes to capital gains tax rates applying to the disposal of shares. This included capital from companies through a formal members voluntary liquidation (MVL).

The immediate change announced was less dramatic than many thought. It was announced there would be an increase in the rate of 4%, from 20% to 24%. This still leaves a material tax advantage to capital distributions from a liquidation in comparison to income dividends for higher and additional rate taxpayers.

What is business asset disposal relief (BADR)?

BADR provides a lower rate of CGT (currently on the 10%) on the first £1m gain on the disposal of certain business assets within a lifetime. This includes distributions from a solvent liquidation.

Despite speculation that BADR would be abolished, it has been continued, subject to the same lifetime limit. However, the rate of tax will increase by 4% at each of 6 April 2025 and 6 April 2026. If the amount of the gain on the relevant disposal is more than the lifetime limit available, this is an extra tax change of £40,000 each year. Potentially £80,000 each year for a couple.

Planning before business asset disposal relief changes

If your company is nearing the end of its useful life and has capital to be extracted (and assuming you still have some BADR available within the lifetime limit), consider putting plans in place to achieve the liquidation of the company and the distribution of its assets before the tax increase kicks in April next year. Accelerating a liquidation is most likely to be attractive if there is a substantial gain, currently taxable at 10%.

There are anti-avoidance provisions which need to be navigated. These focus principally on the nature of the company’s activities and whether a shareholder will be doing the same (or similar) activities within the two years following the distribution from the liquidation. If they do, HMRC may challenge the capital nature of the distribution and seek to treat it as income.

Contact our restructuring team

It takes time to plan and execute a solvent liquidation. We can help with planning and considering the wider tax consequences for the shareholders.